The Reserve Bank of Australia appears not to have followed a wait-and-see approach when it stopped cutting rates. Experts say however that further adjustments are possible.
Chief economist at AMP Capital Shane Oliver stated that it was possible that the central banks would lower rates due to the weak economic outlook. RBA predicts that the economy will grow by 3.3% in 2021. The bank has however lowered its outlook for this year to 2.25%. The RBA had a year-end expectation of 2.5%. It was 3.25% one year ago.
He tweeted that he felt a lot more positive and that the RBA had likely decided to pause on relaxing to allow tax-and-rate cuts to be made in a shorter time frame.
— Shane Oliver (@ShaneOliverAMP) November 5, 2019
We are seeing more reductions
KPMG’s chief economist Brendan Rynne stated that economic indicators are still below target. This could lead to further reductions by the RBA.
“When I look at the three key factors – underlying inflation, unemployment and exchange rates – there are more reasons to drop rates than there are to keeping them on hold,” he told 9News.
RBA also implied an easing bias in its statement. In its post-monetary meeting statement, it stated that it will continue to “monitor developments”, which includes in the labour market, and is ready for further ease in monetary policies if necessary to support sustained economic growth, full employment, and the achievement of the inflation target over time.
Recent data suggesting weak retail sales might indicate that consumers have not received rate and tax cuts could be an indication of this.
Westpac’s chief executive Brian Hartzer raised concerns about the possibility of lowering interest rates, which could lead to a drop in economic growth and threaten consumer confidence.
“I think it has helped, but I have some sympathy for the view that it’s not obvious that further rate cuts increase confidence, they may actually dent confidence. So, I think we’re certainly approaching the end in terms of interest rates being able to stimulate activity,” Hartzer told The Sydney Morning Herald.
CoreLogic CEO Tim Lawless shared similar insights and stated that they could impact the economic outlook.
He stated that the historically low interest rates have had the unfortunate side effect of making Australian households less optimistic about their future and financial prospects. This is counteracting some positive effects of historically low rates.
What Australia needs
Oliver tweeted that although rate cuts could be helpful, a fiscal stimulus would be more effective.
“This would give you more bang for your buck and be more targeted. He indicated that the RBA was under pressure to maintain easing without fiscal stimulus.
The Conversation conducted a separate study and found that many economists don’t believe the RBA has the ability to do all of the necessary work to stimulate the economy. Seven of the 13 economists who were interviewed believed that fiscal stimulus (which includes more spending by government for infrastructure) is most important.
Three said both fiscal and monetary measures are needed while the remaining three would want a “structural reform”, including measures to help the economy deal with climate change and remove red tape.
“Taken together, the responses of the 13 economists suggest it is ultimately the government’s responsibility to ensure the economy doesn’t weaken any further, and that it would be especially unwise to palm it off on to the Reserve Bank at a time when the bank’s cash rate is close to zero and the effectiveness of the unconventional measures it might adopt is in doubt,” Australian National University’s Peter Martin, the study author, said.